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Short Summary
Main recommendation: Stay invested in equities and consider bonds, as UBS's Jason Katz argues that strong earnings growth from AI and productivity gains makes stocks attractive despite recent rate increases. He also suggests that high real rates can coexist with a booming economy, so rising yields alone should not trigger selling index funds.
Key Points
- Katz argues rising Treasury yields reflect a growth economy rather than rising inflation expectations, since inflation breakevens have stayed around 2.25% to 2.35%.
- Forward earnings growth is cited at roughly 17% by Ed Yardeni, with Katz expecting near 20% growth this quarter and next calendar year.
- Hedge funds holding roughly 7% of Treasuries partly drove the recent yield spike through unwinding positions, which Katz says exacerbated the move.
- Katz sees bonds as attractive, especially for high-net-worth investors in states like New York who can earn tax-equivalent yields near equity-like returns.
- Katz expects rates to go somewhat higher before falling, and says UBS expects no rate hike at the next Fed meeting, possibly one in December, with rate cuts expected next year.
Details Worth Noting
- Concrete instructions: The guests did not give step-by-step steps for investors. Their actionable guidance is to consider allocating a portion of portfolios to bonds (especially high-net-worth investors in high-tax states seeking tax-equivalent yields), to stay invested in equities through expected bumps and setbacks, and to buy during fear and sell during greed.
- Larry notes the 10-year Treasury Inflation-Protected Securities (TIPS) yield rose from about 1% to nearly 3% over the past four or five months, which he reads as evidence of a booming economy and real capital returns.
- Katz notes the S&P 500 closed at its 28th record this year and the Nasdaq at its 24th, while Katz identifies AI productivity gains and cohorts of stocks as the market's main drivers.
- Katz disagrees with a 6% Fed rate scenario, calling it unlikely given recent PCE and employment data and Fed governors signaling a slowdown.
- Katz expects the path of least resistance for the S&P 500 to remain higher, though he cautions investors should expect setbacks.
Bottom Line
Katz frames rising yields as a sign of healthy growth rather than a reason to exit markets, and he views both equities and high-tax-state municipal-style bonds as viable allocations, though his views are opinions and not professional investment advice.
